4.5 - The Role of the State Flashcards
What are the three types of taxation?
- Progressive taxation
- Proportional taxation
- Regressive taxation
Define progressive taxation.
Progressive taxation is where, if income rises, a larger percentage of income is paid forward as tax.
Define proportional taxation.
Proportional taxation is where the percentage of income paid as tax remains constant, no matter what the level of tax is.
Define regressive taxation.
Regressive taxation is where, if income rises, a smaller percentage of income is paid as tax.
Give an objective of the tax system.
- Funding government expenditure
Give another objective of the tax system.
Reducing market failure via possibly taxing excise duties on de-merit goods.
Give a third objective of the tax system.
Equitability: This consists of horizontal equity, where firms who have the same income and financial circumstances should pay the same tax. Also there is vertical equity where the tax paid is dependent on the ability to pay.
Give an economic effect of changes in direct or indirect taxation.
Income distibution - Through a progressive tax, such as income tax, lots of tax revenue raised from high income households can go to benefits for the poor.
Give another economic effect of changes in direct or indirect taxation.
Incentive to work - Those whose households earn low income, often have a higher incentive to find work/employment or work overtime, as the wages they earn from here can help redistrubute their income.
Give a third economic effect of chances in direct and indirect taxation.
Balance of trade - With income tax, the disposable income decreases which decreases consumption of goods, leading to a fall in the propensity to consume. This fall in demand for imports decreases imports to a country, helping maintain a balance of trade of imports and exports.
Define automatic stabilisers.
The fiscal changes along with government spending changes as the economy moves through stages of the business cycle; during an economic recession tax revenue will fall, and in a recession, government spending on state welfare benefits rises.
What is discretionary fiscal policy?
Discretionary fiscal policy is altering government policy regarding government spending and taxation, in a bid to achieve economic objectives.
What is a balanced budget?
A balanced budget is where the government expenditure = tax revenues.
What is a budget surplus?
A budget surplus is where the government spending is less than the tax revenues.
Describe a budget deficit.
A budget deficit consists of government spending exceeding tax revenues. This is also what happens during a fiscal deficit.
